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Chapter 6: Problem 19

The Mahoney Company has prepared a sales budget of 45,000 finished units for a three-month period. The company has an inventory of 16,000 units of finished goods on hand at December 31 and has a target finished goods inventory of 18,000 units at the end of the succeeding quarter. It takes three gallons of direct materials to make one unit of finished product. The company has an inventory of 60,000 gallons of direct materials at December 31 and has a target ending inventory of 50,000 galIons at the end of the succeeding quarter. How many gallons of direct materials should be purchased during the three months ending March \(31 ?\)

Short Answer

Expert verified
The Mahoney Company should purchase 131,000 gallons of direct materials.

Step by step solution

01

Calculate Total Units Needed

First, determine the total number of finished units the company needs to have during the period. This includes the units needed for sales, as well as the desired ending inventory. The calculation is:\[ \text{Total Units Needed} = \text{Sales Budget} + \text{Ending Inventory} \]\[ \text{Total Units Needed} = 45,000 + 18,000 = 63,000 \text{ units} \]
02

Determine Units to be Manufactured

To find out how many units need to be produced, subtract the initial inventory from the total units needed.\[ \text{Units to be Manufactured} = \text{Total Units Needed} - \text{Beginning Inventory} \]\[ \text{Units to be Manufactured} = 63,000 - 16,000 = 47,000 \text{ units} \]
03

Calculate Total Direct Materials Needed

Since each finished unit requires 3 gallons of direct materials, multiply the number of units to be manufactured by the gallons required per unit:\[ \text{Total Direct Materials Needed} = \text{Units to be Manufactured} \times \text{Gallons per Unit} \]\[ \text{Total Direct Materials Needed} = 47,000 \times 3 = 141,000 \text{ gallons} \]
04

Determine Direct Materials to be Purchased

To find out the amount of direct materials to be purchased, calculate the difference between the total materials needed and the materials already on hand plus the desired ending inventory.\[ \text{Direct Materials to be Purchased} = \text{Total Direct Materials Needed} - \text{Beginning Inventory} + \text{Ending Inventory Target} \]\[ \text{Direct Materials to be Purchased} = 141,000 - 60,000 + 50,000 = 131,000 \text{ gallons} \]

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Direct Materials
Direct materials are the raw substances that are essential in the manufacturing process to create a finished product. In the case of Mahoney Company, each finished unit requires three gallons of direct materials. This information is crucial for calculating how much of these materials need to be purchased during the budgeting period.
The company needs to calculate the total amount of direct materials it will use over the quarter to ensure it does not run out. Mismanagement of these materials can halt production and lead to delays. To plan effectively, a company must account for:
  • The amount of material needed for producing new units.
  • The beginning inventory of direct materials available.
  • The desired ending inventory to act as a buffer for the next quarter.
By balancing these factors, Mahoney Company plans their inventory flows and ensures efficient production without excess costs.
Finished Goods Inventory
Finished goods inventory refers to the completed products that are ready to be sold or shipped to customers. For Mahoney Company, this involves understanding both the current stock of ready-to-sell units and planning the ending inventory they aim to have by the quarter's end for future sales.
Proper management of finished goods inventory ensures that there is always enough product to meet customer demand without overstocking. Overstocking can lead to increased storage costs and potential waste if the goods remain unsold for long periods. Therefore, Mahoney targets to have 18,000 units of finished goods as ending inventory at the end of the succeeding quarter. To determine how much more needs to be produced, the company subtracts its starting inventory from the total targeted units (units for sales plus the ending inventory). This helps in understanding the production flow and aligning it with sales forecasts.
Production Planning
Production planning involves the strategic process of scheduling production activities to ensure that resources are used efficiently to meet demand. This process includes determining the number of units to manufacture in order to align with sales forecasts and inventory needs.
For the Mahoney Company, the production plan takes into account the current finished goods inventory and the desired ending inventory. By calculating the number of units to be manufactured, the company can ensure it is on track to meet its sales targets.
  • First, they identify the total units needed, including those for sale and the ending inventory.
  • They adjust this number by subtracting the starting inventory to find the actual production target.
  • This guides the subsequent steps of securing direct materials to meet the production requirements.
Effective production planning helps optimize resource use, minimizes costs, and ensures that the production schedule aligns with sales goals.

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Most popular questions from this chapter

"Cash budgets must be prepared before the operating income budget." Do you agree? Explain.

Inglenook Co. produces wine. The company expects to produce 2,500,000 two- liter bottles of Chablis in 2012 . Inglenook purchases empty glass bottles from an outside venIts target ending inventory of such bottles is 80,000 ; its beginning inventory is 50,000 . For simplicity, ignore breakage. Compute the number of bottles to be purchased in 2012.

Outline the steps in preparing an operating budget.

Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment) affects behavior.

Consider each of the following independent situations for Anderson Forklifts. Anderson manufactures and sells forklifts. The company also contracts to service both its own and other brands of forklifts. Anderson has a manufacturing plant, a supply warehouse that supplies both the manufacturing plant and the service technicians (who often need parts to repair forklifts) and 10 service vans. The service technicians drive to customer sites to service the forklifts. Anderson owns the vans, pays for the gas, and supplies forklift parts, but the technicians own their own tools. 1\. In the manufacturing plant the production manager is not happy with the engines that the purchasing manager has been purchasing. In May the production manager stops requesting engines from the supply warehouse, and starts purchasing them directly from a different engine manufacturer. Actual materials costs in May are higher than budgeted. 2\. Overhead costs in the manufacturing plant for June are much higher than budgeted. Investigation reveals a utility rate hike in effect that was not figured into the budget. 3\. Gasoline costs for each van are budgeted based on the service area of the van and the amount of driving expected for the month. The driver of van 3 routinely has monthly gasoline costs exceeding the budget for van 3. After investigating, the service manager finds that the driver has been driving the van for personal use. 4\. At Bigstore Warehouse, one of Anderson's forklift service customers, the service people are only called in for emergencies and not for routine maintenance. Thus, the materials and labor costs for these service calls exceeds the monthly budgeted costs for a contract customer. 5\. Anderson's service technicians are paid an hourly wage, with overtime pay if they exceed 40 hours per week, excluding driving time. Fred Snert, one of the technicians, frequently exceeds 40 hours per week. Service customers are happy with Fred's work, but the service manager talks to him constantly about working more quickly. Fred's overtime causes the actual costs of service to exceed the budget almost every month. 6\. The cost of gasoline has increased by \(50 \%\) this year, which caused the actual gasoline costs to greatly exceed the budgeted costs for the service vans. For each situation described, determine where (that is, with whom) (a) responsibility and (b) controllability lie. Suggest what might be done to solve the problem or to improve the situation.
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